Question

Why might the use of a tariff to decrease aggregate unemployment in a country eventually generate an increase in aggregate unemployment in that country?

Answer 1

Tariff is a tax that the government of a country imposes on import of particular goods or services in the country. This increases the cost of the imported goods and services.

The aim of imposing tariff is to reduce the amount of import and to protect the domestic producers from the foreign competition. This aims to increase production and reduce unemployment.

But with the imposition of tariff, the amount and choices of goods available in the country reduces for the consumers. This results in reduction of expenditure and further the income of the producers. So ultimately it leads to increase in the rate of unemployment in the country.